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Authors Leonardo Bartolini and Amartya Lahiri analyze the relationship between
the increase in the size of fiscal deficits in a large number of industrialized
and developing nations and the current account deficits of those countries.
They do not find sufficient evidence to support the argument that cutting a
nation’s fiscal deficit would significantly reduce its current account
deficit.

The authors cite international data that every dollar of increase in fiscal
deficit, accounted for primarily by tax cuts, goes in large measure to consumer
savings rather than consumption. As a result, some of a nation’s need
to borrow from abroad to finance its fiscal deficit is mitigated and its current
account deficit is left relatively untouched.

According to the authors, when applied to the United States, this analysis
suggests that even if the fiscal deficit—now about 2 percent of GDP—were fully erased, the nation’s current account deficit would
improve by only a fraction of its current 7 percent of GDP.

Leonardo Bartolini is a senior vice president in the International Research
Function of the Research and Statistics Group; Amartya Lahiri is a professor
of economics at the University of British Columbia.